Oil price plunge signals high uncertainty over economy

August 10, 2011

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Oil Refinery

By , PARIS, Aug 10 – Oil is riding a “big dipper,” with prices plunging again on uncertainty about debt levels in the West, signs of a slowdown in emerging markets and political paralysis, the IEA said on Wednesday.

“Crude oil prices have plunged for the third time in three months,” the IEA said, noting a drop of $12-15 dollars a barrel in about 10 days, as it cut its demand forecast for this year.

The International Energy Agency trimmed its estimate for global oil demand this year by 100,000 barrels per day because of a downward revision to demand in the second quarter, high prices and “slowing economic growth.”

At the same time, it raised its 2012 forecast by 100,000 barrels per day, anticipating that Japan will increase its oil consumption as it makes up for the loss of nuclear generated power in the aftermath of the devastating March earthquake.

Warning that the outlook is very volatile, the IEA said “August has a habit of springing both geopolitical and meteorological surprises, so the big dipper ride may still have further to run.”

Oil prices were higher just before the IEA published its monthly report, at $81.02 per barrel for the benchmark US WTI contract, a gain of $1.72 dollars.

The IEA’s new forecasts put demand this year at 89.5 million barrels per day, up 1.2 mbd or 1.4 percent from 2010, with 2012 rising to 91.9 mbd, up 1.6 mbd or 1.8 percent from this year.

Should global economic activity slow by more than expected, however, the demand figure for this year would be cut by 0.3 mbd and next year by 1.3 mbd.

The IEA, the energy monitoring arm of the Organisation for Economic Cooperation and Development, said: “Concerns over debt levels in Europe and the US, and signs of slowing economic growth in China and India have spooked the market and raised fears in some quarters of a double-dip recession.

“From an oil market standpoint, perceived wisdom is that this must inevitably mean weaker oil demand to come.”

It noted that extra supplies of oil were now reaching the market, notably because members of the Organization of Petroleum Exporting Countries had increased supplies in order to make up for a shortfall in Libya.

Another factor was that the IEA had earlier released oil from emergency stocks for 30 days to bridge a period of tightness arising from the strangling of supplies from Libya.

“This has been sufficient to sharply weaken prices. Lower energy input costs are well and good but not if they are achieved at the cost of another economic crisis,” the IEA said.

“Arguably, political paralysis has played a greater role in the current situation than has the financial sector.”